Gas Adds Energy to Israeli Diplomacy Dominated by Conflicts

Most of Israel’s gas is contained in two offshore fields in the Mediterranean Sea: Tamar, seen here, which began production in March, and Leviathan, about twice Tamar’s size. Source: Albatross via Getty Images

June 12 (Bloomberg) -- Israeli foreign policy, dominated by
conflict with its neighbors, may be entering a new era as the
country turns into a natural-gas producer.

Exploiting energy discoveries off its Mediterranean shore
will require Israel to soon decide on how much it wants to
export, by what means and to which markets. That’s influencing
relations with Cyprus, Turkey and Lebanon, spurring concern from
rival producer Russia, and attracting interest from potential
customers China and South Korea.

“This a new age for Israel,” said David Wurmser, director
of Washington-based Delphi Global Analysis Group. “While the
quantities are still modest in global terms, Israel could
strategically leverage marginal amounts of gas for major impact
if it utilizes them correctly.”

Energy is already offering a potential bridge to Turkey.
While the two countries work on restoring diplomatic ties frayed
by a deadly Israeli raid three years ago on a Turkish-led
flotilla bound for the Gaza Strip, Turkish Energy Minister Taner
Yildiz was talking last month about joint energy projects. The
country is the most feasible route for future Israeli natural
gas exports, he told reporters in Ankara on May 28.

Israel has thus far discovered about 950 billion cubic
meters of offshore gas, sufficient to fill the country’s
domestic needs for decades with enough left over for export. It
would be worth about $340 billion, equal to 36 percent more than
the country’s gross domestic product, based on calculations from
today’s prices in the U.K.

Pond Size

While those numbers are a fraction of the reserves held by
gas powerhouses such as Russia and Qatar, the U.S. Geological
Survey estimates that the East Mediterranean basin, which also
includes the territorial waters of Cyprus, Lebanon and Egypt,
may hold as much as four times what’s been found to date.

“The gas could be a geopolitical game changer for Israel,
if it makes the right decision,” Gal Luft, senior adviser to
the United States Energy Security Council in Washington, said in
an interview on a visit to Israel last week. “That decision is
whether it tries to become a minor player in the global
liquefied natural gas market, or a big fish in a smaller pond by
exporting to regional isolated markets.”

Prime Minister Benjamin Netanyahu’s ministers agreed this
week in principle to allow 40 percent of the gas to be exported,
a person familiar with the matter who was not authorized to
comment officially said today. That’s below the about 50 percent
recommended last year by a government appointed panel. The final
decision will need to be approved by the cabinet.

Mixed Effect

The gas finds have had a mixed effect so far on relations
in the region. Israel’s ties with Cyprus have strengthened
thanks to the gas fields that straddle their maritime border.

In Turkey, where the Islamist-rooted Prime Minister Recep
Tayyip Erdogan has been facing down protesters saying he’s too
autocratic, a report on the possibility of Israeli gas links is
being readied for the premier should ties with the Jewish state
normalize, Yildiz, the energy minister, said last month.

The discoveries have also exacerbated tensions for Israel.
Its neighbor Lebanon, which has begun its own offshore energy
exploration, is disputing a maritime border zone measuring 854
square kilometers (330 square miles). Militant group Hezbollah,
which fought a war with Israel in 2006, has vowed to protect the
Lebanon’s offshore resources.

Exploring Options

Most of Israel’s gas is contained in two offshore fields in
the Mediterranean Sea: Tamar, which began production in March,
and Leviathan, about twice Tamar’s size. Commercial production
of gas at Leviathan is expected around 2016, according to
Houston, Texas-based Noble Energy Ltd.

The government’s gas export policy has to allow for
“multiple options,” Binyamin Zomer, director of corporate
affairs in Israel for Noble, said on the sidelines of a gas
industry conference in Tel Aviv last week. “We will explore
every opportunity, but if the range is too limited, some of
those opportunities will be lost.”

Noble’s partners in Tamar and Leviathan include Israeli
companies Delek Drilling Ltd., Ratio Oil Exploration Ltd., Avner
Oil & Gas Lt. and Isramco Negev 2 LP. Shares in the four
companies have all performed better than the benchmark TA-25
index over the past 12 months, rising as much as 26 percent.

Political Backdrop

“The companies will ultimately be the ones deciding how
the gas will be exported and to what markets,” said Pinhas
Avivi, an Israeli Foreign Ministry official who served on the
gas exports panel advising the government. “Of course we will
give recommendations to the companies and can help by creating
the right kind of political environment.”

So far, the gas companies have only signed contracts for
Israel’s domestic market, including a 15-year deal with Israel
Electric Corp. Australia’s Woodside Petroleum Ltd., which has
experience in liquefied natural gas production, agreed in
December to acquire 30 percent of the Leviathan field for an
initial $696 million, though the deal is still pending.

One export option they are looking at is constructing a
floating LNG platform in Israeli waters. That could avoid many
of the regulatory and environmental obstacles that might delay
an on-shore facility, Avivi said.

Korea’s Daewoo Shipbuilding & Marine Engineering joined
with the Tamar partners to set up Levant LNG Marketing Corp. and
examine building a floating LNG platform at that field.

Gazprom Eye

Israeli gas has also attracted the interest of Russia’s OAO
Gazprom, the world’s biggest natural gas producer, which in
March signed a preliminary arrangement to buy gas from Levant
LNG. Gazprom will decide whether to go ahead with the deal by
the end of this year, the Moscow-based company said on Feb.6.

The company “is not a standard economic enterprise because
it has an overlay that is tied to the elites and policies of
Russia,” said Wurmser, who served as a foreign-policy adviser
to former U.S. vice-president Dick Cheney. With the entry of
Gazprom, “Israel essentially begins to lose control over gas
policy at that point,” he said.

Israel, though, would be unwise “to compete directly with
Russia,” said Avivi.

One way to sidestep that would be to export via Turkey,
which serves as a regional gas hub and needs increasing amounts
of energy for itself to realize Erdogan’s dream of vaulting the
country into the top 10 of the global economic elite.

Turkey Pipeline

“A pipeline from Leviathan to Turkey is not unrealistic,”
Ratio Chief Executive Officer Yigal Landau told Bloomberg in
February. Liquefying the gas for export to Asian markets is
still “the first obvious option,” he added.

Avivi, who served as Israeli ambassador to Ankara from 2003
to 2007, said the two countries maintained some $4 billion in
trade during the past three years even as the diplomatic crisis
over the Gaza blockade deaths continued.

Energy policy may also influence the political situation in
Cyprus, which has been divided since 1974 after a Turkish
invasion of the north of the island.

Exporting to Turkey might require construction of a
pipeline routed through Cyprus to avoid the hostile waters of
Lebanon and Syria. That prospect appears more feasible given the
Israeli-Turkish rapprochement and as the financial crisis in
Cyprus and Greece forces the countries to look at attracting
outside investment in their energy industries.

Palestinians

Rather than looking that far afield, “Israel should first
and foremost consider exports to its immediate neighbors, Jordan
and the Palestinians,” according to Michael Leigh, senior
adviser to the German Marshall Fund of the United States, a
Washington-based public policy institute.

Jordan, like Israel, was cut off from Egyptian gas imports
last year after multiple attacks by militants on the Sinai
pipeline system. Israeli gas could help stabilize its economy
when it is being strained by a flood of refugees fleeing Syria’s
civil war, now in its third year, Leigh said.

It is also in Israel’s geopolitical interest to use the gas
to help develop the Palestinian economy, he added, including
“coming to grips with allowing and encouraging the development
of a potential gas field off the Gaza coast.”